Assignment: Chapter 2: Emerging Markets: High Fashion Fights Recession

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Emerging Markets: High Fashion Fights Recession
Pumping out fancy clothing, handbags, jewelry, perfumes, and watches, the high end of
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the fashion industry— otherwise known as the luxury goods industry—had a challenging
time in the Great Recession. In 2008, banks were falling left and right, unemployment
rates sky high, and consumer confidence at an all-time low. In 2009, total luxury goods
industry sales fell by 20%. How did the industry cope?
Of the five forces, the threat of substitutes was relatively insignificant. Potential new
entrants were not dying to enter when incumbents were struggling. Suppliers such as
leather tanneries were hit hard by cancelled or scaled-down orders from auto
companies, shoemakers, and furniture firms. Suppliers thus were eager to work with any
order that luxury goods firms could lavish on them. As a result, managing industry
competition boiled down to how to manage rivalry among competitors and manage
customers.
The high-end fashion industry was dominated by the Big Three: LVMH (with more than
50 brands such as Louis Vuitton handbags, Moët Hennessy liquor, Christian Dior
cosmetics, TAG Heuer watches, and Bulgari jewlery), Gucci Group (with nine brands
such as Gucci handbags, Yves Saint Laurent clothing, and Sergio Rossi shoes), and
Burberry (famous for raincoats and handbags). Next were a number of more specialized
players such as king of mens-wear Ermenegildo Zegna and queen of womenswear
Christian Lacroix . Virtually all firms in this industry pursued a differentiation strategy
and a smaller number of them engage in a focus strategy. By definition, high fashion
means high prices. An informal code of conduct (or norm) permeates the industry: no
discount, no coupons, no price wars please—in theory at least. Discounting, so
frequently used in the low-end fashion industry, is generally viewed as dangerous and
poisonous, not only to the occasional firm that unleashes it, but also to the image and
margin of the whole world of high fashion. But here is the catch: How do firms survive
the Great Recession when such nasty tactics are not advised?
In desperation, many firms cut prices—but quietly. At Tiffany jewelry stores, sales
people advised customers about diamond ring price reductions, but otherwise there was
no publicity. Gucci and Richemont (with brands such as Cartier jewelry, Vacheron
Constantin watches, and Alfred Dunhill menswear) offloaded their excess inventory to
discount websites. Coach launched a lower-priced line branded Poppy as a fighter
brand without cheapening the image of the Coach brand. During the month prior to
Christmas in 2008, American department stores such as Macy’s and Saks Fifth Avenue
offered some savage price slashing of up to 80% of some luxury goods. The only firm
that stood rock solid was the industry leader LVMH, which claimed that it never puts its
products on sales at a discount. When the going gets tough, it destroys stock instead. In
contrast to many luxury goods firms that rely on department stores, LVMH owns its
retail shops, thus allowing it to completely control the fate and price of its own products.
The bloodbath in the Great Recession forced the weaker players such as Christian
Lacroix and Escada to file for bankruptcy. But it made stronger players such as LVMH
even more formidable. They benefitted from an established pattern in high fashion: the
flight to quality. In other words, when people have less money, they spend it on the best.
Shoppers go for fewer, more classic items, such as one Burberry raincoat (as opposed to
two designer dresses) and one Kelly bag by Hermès (rather than three bags by less
prestigious brands). For this reason, LVMH, according to its proud president, “always
gains market share in crises.” LVMH’s sales grew from $24 billion in 2008 to $29 billion
in 2011, with profit margins at a healthy 40% or so—twice as high as some of its weaker
rivals.

In addition to managing interfirm rivalry, how to manage the fickle and capricious
customers was tricky. Although the seriously rich were not affected by the Great
Recession, their number remained small. Most luxury goods firms had been relying on
the “aspirational” customers to fund their growth. As the recession became worse, many
middle-class customers in economically depressed, developed economies began to hunt
for value instead of triviality and showing off. Japan had been the number one market
for luxury goods for years and most Japanese women reportedly owned at least one
Louis Vuitton product. But sales were falling since 2005 and dropped sharply since
2008. Young Japanese women seemed more individualistic than their mothers, and
often hauled home lesser-known (and cheaper) brands.
Emerging markets, especially China, offered luxury goods firms the best hope while the
rest of the world was bleak. Since 2008, while global sales declined, Chinese
consumption (both at home and traveling) had been growing between 20% and 30%. In
2009, China surpassed the United States to become the world’s second-largest market.
In 2011, China rocketed ahead of Japan for the first time as the world’s champion
consumer of luxury goods—splashing $12.6 billion to command a 28% global market
share. Everybody that was somebody in high fashion had been elbowing its way into
China, which appears like the New World to old European brands. Interestingly, several
years ago it was the Japanese ladies who did the heavy lifting for the top line of luxury
goods firms; now it is the Chinese dudes who (are more likely than Chinese women to)
eagerly open their wallets to indulge themselves with luxurious trappings. Beyond
China, luxury goods firms eagerly chased customers in Brazil, India, Poland, Russia, and
Saudi Arabia. Where did LVMH open one of its newest stores? Ulan Bator, Mongolia.
Sources:

(1) BusinessWeek, 2009, Coach’s new bag, June 29: 41–43;

(2) BusinessWeek, 2009, When discounting can be dangerous, August 3: 49;

(3) Economist, 2009, LVMH in the recession , September 19: 79–81;

(4) Economist, 2010, Fashionably alive, November 13: 76;

(5) Economist, 2010, Luxury goods in Poland, June 19: 72;

(6) Economist, 2011, The glossy posse, October 1: 67;

(7) J. Li, 2010,Luxury Brands Management, Beijing: Peking University Press.

Using the five forces framework, how would you characterize the competition in the
luxury goods industry?

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Assignment: Chapter 2: Emerging Markets: High Fashion Fights Recession
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How much bargaining power did consumers as buyers have during the Great Recession?

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Why was discounting looked down upon by industry peers, all of which were
differentiated or focus competitors?
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What would be the likely challenges in emerging markets for luxury goods firms?

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